Capital Markets Executives at Leading I-Banks Say Valuations of Pre-IPO Internet Businesses Inflated According to BDO USA, LLP

CHICAGO--(BUSINESS WIRE)--According to a new study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations, capital markets executives at leading investment banks clearly have conflicting opinions of pre-IPO Internet businesses and the private marketplaces where their shares are traded. Although more than three-quarters (79%) of the investment banking community feel private marketplaces, such as SecondMarket and SharesPost, are having a positive influence on the U.S. IPO market, a similar percentage (75%) feel the multi-billion dollar pre-IPO valuations of many Internet businesses are not justified. Moreover, a majority (62%) feel the chances of a second dot-com bubble, similar to the 1990s, is at least somewhat likely.

“When you combine the inflationary effect of the pre-IPO, private marketplace with the common practice of Internet businesses only releasing a small number of shares in initial offerings to drive up demand, it isn't surprising that the investment banking community believe concerns about a possible Internet bubble are warranted”

"Given the recent success of the LinkedIn IPO and the high valuations associated with other social media businesses expected to seek public offerings within the next year, it is understandable that the capital markets community feels private, pre-IPO marketplaces are a positive influence on the U.S. IPO market," said Lee Duran, a Partner in the Capital Markets and Technology Practices at BDO USA. "However, looking beyond the offering transaction, the bankers clearly feel the limited volume of shares in the private market is inflating valuations of these businesses to the point that they have concerns that a bubble may be developing."

More than two-thirds (71%) feel the small volume of trades in the private, pre-IPO marketplace has served to inflate the value of these businesses and a majority (64%) of the capital markets executives are in favor of the SEC easing constraints on the number of shares that can be issued and the amount of capital raised prior to these businesses being forced to go public.

Interestingly, when asked to identify a group that will be most negatively impacted by the easing of shareholder limits in private companies, more than a-third (38%) of the I-bankers cited their own industry. Venture capital (23%) and private equity firms (19%) were also identified as being negatively impacted, but a fifth (20%) of the bankers didn't believe any one group would be disproportionately affected.

Contributing Factors

The small volume of trading in the private marketplace isn't the only factor in driving high valuations of pre-IPO Internet businesses. When asked what the chief factor was in driving the high valuations, the I-bankers identified multiple contributors. Approximately one-third (34%) cited the scarcity of shares in pre-IPO markets hyping demand, one-quarter (25%) attributed the valuations to the growth of the Internet itself and a like amount (22%) cited the profitability of the businesses. Approximately one-fifth (19%) of the I-bankers alluded to the positive performance of recent Internet offerings as the primary driver.

"When you combine the inflationary effect of the pre-IPO, private marketplace with the common practice of Internet businesses only releasing a small number of shares in initial offerings to drive up demand, it isn't surprising that the investment banking community believe concerns about a possible Internet bubble are warranted," said Jay Duke, a Partner in the Capital Markets Practice at BDO USA. "At the same time, any comparisons between today's market and the dotcom crash of the late 1990s are simply not accurate. In the Nineties, you had businesses that were little more than a concept going public. For the most part, today's Internet offerings have sound business models with real customers, real revenue and real profits. Moreover, they all benefit from the enormous growth of the social and mobile Internet market over the past decade."

These findings are from The BDO IPO Halftime Report, a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, on behalf of BDO USA. Executive interviewers spoke directly to capital markets executives within a scientifically-developed, pure random sample of the nation's leading investment banks.

BDO USA is a valued business advisor to businesses making a public securities offering. The firm works with a wide variety of clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on a myriad of accounting, tax and other financial issues.

About BDO USA

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,082 offices in 119 countries.

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